Monday Morning Quarterback: Mickey Mantle Won't Pay Our Rent

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"I will never forget the look on their faces. All eight of them. Their faces dropped. All their courage and strength was drained right from their bodies. They had a reputation for breaking up bars, but they knew in that instant, they'd made a fatal mistake. This time they walked into the wrong bar."--Calogero "C" Anello, A
Bronx Tale

Pop Quiz: Why does Chazz Palminteri encapsulate this financial juncture better than any other actor of our generation?

Answer:His
Bronx bred tough guy persona sums up our bitter battle, both in terms of how we got here and where we'll together go.To wit, we've long offered there was an invisible hand in the marketplace.We summed up our stance a year ago when we mused in Unusual Suspectsthat the greatest trick the devil ever pulled was convincing the world he didn't exist.

As the devil is in the details, we now find ourselves in a situation where the lesser of two presumable evils has been enacted, a $700 billion bailout bill that masks the symptoms but doesn't cure the disease.

The government is attempting to "buy the cancer and sell the car crash."While the latter matter is still possible, the former storm will cycle through stages until such a time that we rid ourselves of the underlying illness.

Our task at hand is to identify the unavoidable journey towards an unenviable destination-debt destruction-while respecting the manifestation of unintended consequences along the way.At the top of the list are social mood and risk appetite, which shape the tape and determine price action.

The process of price discovery continues as we edge our way through these historically significant times.That is a two-sided proposition, although as I wrote on Friday, the path of maximum frustration is that we just spent hundreds of billions in taxpayer money, politicians voted against the wishes of their constituency and the markets continue lower in kind.

Stocks are the world's biggest thermometers but credit is the backbone.While you can jog with a fever, you can't run without vertebrae.That remains the single greatest caveat for markets as a whole.You can lead a bank to liquidity but you can't make them lend.

As that point of recognition arrives, we're carefully conscious of all sides of the current environment.In March, we wrote Chasing Liberty and offered that once the government nationalized Fannie Mae (FNM) and Freddie Mac (FRE), one of three scenarios would likely unfold:

The system will repair itself as real estate rebounds and the underlying collateral starts to appreciate.That preferred path would allow the Fed to transition assets back to the balance sheets of the banks and unwind the most recent round of intervention.

If the economy continues to deteriorate, the Federal Reserve would effectively and eventually become insolvent. It wouldn't go bankrupt, it will simply print more currency and further dilute the value of the dollar (and bring us back to the second scenario).

To be sure, the economy doesn't appear to be improving.While the market is a leading indicator and news is always worst at the bottom, we can easily extrapolate a scenario that includes rising unemployment, further mortgage deterioration, slowing global growth and the introduction of Herstatt (international settlement) Risk.